Thursday, June 26, 2014

There's old and then there's the Insulbrick

So if you have not read it, Jim R. has something of a viral hit in a recent column:Not So Much ‘New York Poor’ as ‘Pittsburgh Rich’

Regional variability in the cost of living is pretty much about housing and the issue of housing affordability is a pretty large topic.  Still, if there is a "Pittsburgh Rich" story it is about some lower cost housing still to be had across the region.

But you have to think about what housing we have and in a lot of ways our housing is not the housing available elsewhere.  Put another way, you get what you pay for.  This all came to mind because the WashPo's Wonkblog has a whole little data story on the age of housing across the US. See: Map: The age of housing in every zip code in the U.S.

Nice little bit of data work, but it does not really give you the benchmarking to make it useful. By many measures, Pittsburgh has some of the oldest housing stock in the nation.  Sort of like with us, its not about temporal age, but 'real' age.  The only major city that really comes close to Pittsburgh for old housing is Boston, and I will bet that our housing is a tad bit more disinvested than the older housing of Boston.  So if you are interested in the topic locally, this this map I like to call the Insulbrick index

Still, the best quote that encapsulates it all is:
"It is cheap to live here. It's the only city I know of where you can have a part-time job at a coffee shop, still afford a mortgage payment and be able to go out once a week. ... How would that not be appealing to any young person who isn't ready to settle down?"
From the PG a few years ago: Watch out Portland, Pittsburgh's lookin' hip, Is it really possible we are actually, authentically cool?


Anonymous BrianTH said...

"Put another way, you get what you pay for."

I think the point about a lot of Pittsburgh homes being older is an interesting one, although of course some of us like that.

But generally speaking, that statement is not really true as applied to U.S. housing, as many have documented. Housing is durable, the potential demand track has varied by place, and the constraints on new housing supply have varied by place. So, in places where potential demand growth has been robust but the supply response has been substantially constrained, you really do pay more for equivalent housing due to the resulting scarcity.

Conversely, in places like Pittsburgh, until recently potential demand growth has been weak (or even negative), and that means there has not been this sort of appreciation resulting from supply constraints (of course it remains to be seen if we can do better on the supply side than some of our northeastern peers now that potential demand may be following a similar track).

I think it is important to emphasize that all this doesn't mean Pittsburgh housing is artificially cheap. It is more that housing in some other U.S. cities is artificially expensive. So sure, HERE you more or less get what you pay for. But that actually is enough to distinguish Pittsburgh from a lot of places where in fact you get less than what you pay for.

Although of course even that isn't quite right--obviously there must be some reason people are paying those very high prices for housing in such cities. But the answer (mostly) isn't that their housing are so much newer or otherwise nicer. The answer is that they need or want to live in that place for some other reason--job opportunities, being close to family, or so on--and the higher prices they pay for housing are part of the price of admission.

But then the question becomes, do you as an individual really NEED to live in one of those supply-constrained, high-price cities? If you figure out the answer is no, then you really can come out ahead by refusing to pay that price of admission.

Thursday, June 26, 2014 1:52:00 AM  
Anonymous Anonymous said...

Might be we're moving to a more supply-constrained scenario. We've been window shopping houses and I noticed that the Zestimate average home estimate for the city of Pittsburgh has risen from $77k to $88k in the past 12 months. It took nearly ten years for it to go from $67k to $77k...

Thursday, June 26, 2014 8:53:00 AM  
Anonymous BrianTH said...

So ultimately the situation is approximately "normal" when new housing units are going for around the cost of constructing them (including the cost of capital), plus a bit more for the land utilized (this land factor can vary based on locational value and the land area per housing unit), or a rent more or less financially equivalent. Old housing units in a "normal" situation should be benchmarked to the new housing units, factoring in depreciation, which in turn can be offset with new investment in renovation.

I'd suggest new housing units in Pittsburgh are typically priced right around this "normal" level, as are recently fully-renovated units. But those prices can often strike local people as very high, in part because they are used to looking at averages and such reflecting depreciation and limited renovation (this is one of the spots where Chris's observation is in fact worth making).

You can also argue that in certain areas, older houses were in such oversupply that they were priced even below a "normal" depreciation allowance. It is hard to disentangle that possibility from other factors that might affect housing prices in certain areas, and of course housing units can and do get withdrawn from the market when the supply is excessive. However, to the extent those withdrawn housing units could be remarketed in the event of a significant increase in demand/prices, they might serve as something of a constraint on the prices of at least the more marginal units still in the market.

So the upshot is we may be seeing, in at least a few places, the unwinding of an excess supply of older housing units which is contributing to above normal appreciation. Still, though, I think a lot of that observed appreciation is really just the result of changing locational value combined with new investment (in either new units, or renovating old units).

But all of this is an explanation as to why you can see above-normal appreciation in specific locales without necessarily needing to hypothesize supply constraints. The real thing to watch for is when new units are going for way more than the costs of construction (and a reasonable allowance for land) can explain--that is when you have good prima facie evidence of some sort of supply constraint. And I personally don't think Pittsburgh is there yet, although that time may be approaching.

Thursday, June 26, 2014 1:37:00 PM  
Anonymous BrianTH said...

By the way:

"Comparable to the approach he took with Otto Milk, Benoff plans to take a five-story redbrick building on the corner of 25th Street and erect a new building that will be grafted onto it, putting the core of the building and the elevator shaft between them, offering buyers a choice between an old building conversion with exposed brick and wood beam ceilings on one side or completely new construction on the other."

Just saying there are markets for both old and new.

Friday, June 27, 2014 4:22:00 PM  

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